Theme 2 (External Influences)

• Inflation


  An increase in the general levels of prices within an economy
• Exchange rates


  The price of one currency in terms of another – in other words, the purchasing power of one currency against another
• Interest rates


  The reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed
• Business cycle


  The observed pattern of increases and decreases in economic growth (measured by % change in GDP) over the long term
• Appreciation of the pound against the dollar


  Exports will become more expensive and therefore the business might need to lower prices
• Depreciation of the pound against the dollar


  Exports will become cheaper and therefore the business might need to gear up to produce more as demand should increase
• Appreciation of the pound against the dollar


  Imports will become cheaper and therefore the business can either buy more for the same, the same for less, either way reducing costs
• Depreciation of the pound against the dollar


  Imports then become more expensive and therefore the business will have to buy less, spend more or seek goods elsewhere
• Positive effects on business of changes in:

  • Inflation - Price increases might soften any changes in raw material costs
  • Exchange rates - Might increase export/import opportunities
  • Interest rates - Might lower costs if loan repayments decrease
  • Taxation - Lower taxation might lower costs resulting in higher net profits
  • Government spending - Businesses supplying to government agencies will benefit from increased spending
  • Business cycle - Recovery and boom phases lead to increased consumer confidence and greater spending
• Negative effects on business of changes in:

  • Inflation - Consumers on fixed incomes might lose out as prices increase
  • Exchange rates - Might decrease export/import opportunities
  • Interest rates - Might increase costs if loan repayments increase
  • Taxation - Higher taxation might limit supply as costs increase
  • Government spending - If spending is cut, businesses might have to look for sources of revenue from private sector
  • Business cycle - Recessions and slumps show lower consumer confidence and decreased consumer spending
• Two possible effects of economic uncertainty on the business environment:


  • Lower levels of investment from banks and businesses which reduces output
  • Lower levels of demand which reduces consumer spending
• Possible effects on businesses of the following legislation:


  • Consumer protection - Might lead to increases in costs such as product returns and increased attention to quality
  • Employee protection - Increased costs in terms of wage structures and additional time to manage conflict and disputes
  • Environmental protection - Enhanced reputation from committing to reducing carbon footprint
  • Competition policy - Increased chance of survival for smaller businesses protected from large firms using unfair tactics such as predatory pricing
  • Health & safety - Increased costs to comply with and implement effective policies to protect employees and/or customers
• Three ways in which a business could respond to increased competition in the market:


  • Lower prices
  • Differentiate/create USP
  • Add more value
• Two ways in which market size can influence competition:

  • Larger markets are more likely to attract new entrants
  • Smaller markets are more attractive to niche products where value is more relevant than price